Cloud Computing Disrupts Software Accounting Rules

A public relations employee looks over racks of servers at inside pod one of IBM's Softlayer data center. The EU's antitrust chief on Thursday said she would consider the value of data in future merger reviews. Credit: Ben Torres/Bloomberg News
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Cloud computing is shaking up more than just the software industry. It’s also disrupting the way companies account for the cost of researching and developing new software, prompting the need for revised rules.

Companies are allowed to capitalize, rather than expense, the cost of researching and developing software only under certain circumstances, according to current rules, according to Beth Paul, U.S. at PricewaterhouseCoopers LLC’s accounting consulting group.

That includes a feasibility threshold for software for sale or lease, and the completion of the preliminary project stage for developing internal-use software.

But the emergence of cloud computing has blurred these lines, presenting challenges for companies that seek to reflect the value of their intangible software assets in their books, Ms. Paul said in a report.

Many companies are now selling software to clients as a service and under other cloud-based computing models. This trend is expected to grow nearly 30% a year on average, according to PwC.

“Given the increasing importance of software to the US economy, the accounting for software intangibles is an area ripe for reconsideration,” Ms. Paul said. “We believe now is the time to reexamine whether accounting for software should continue to utilize different models,” she said.

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